All Things Financial

By Bill Stoneman and Kenneth Cline

While banks can achieve significant gains selling investment and insurance products, they must offer customers real value.

Charles G. Burkett is watchful, but not yet worried. As president of First Tennessee National Corp.'s Memphis area retail bank, Burkett has been watching for signs of customer money leaving insured bank accounts for the higher yields promised by a rebounding stock market.

So far, he hasn't seen much movement, except in certificates of deposit; core deposits are actually up this year at First Tennessee. And Burkett has confidence First Tennessee can weather any deposit flight that might occur.

Like many large banks, First Tennessee has a comprehensive wealth management strategy focused on keeping customer assets in-house.

"Our company's slogan is 'All things financial,'" Burkett says. "We let customers know we can be their trusted financial advisor."

In recent decades, most of the nation's largest banks adopted variations of this theme as they devoted substantial resources to building up their capabilities in the investments and insurance arenas. Historically, consumers have tended not to look to banks as their first choice for investment advice. These institutions are committed to changing that perception. Will they succeed?

The acid test could come over the next year or so, if customer money flows back into equities. That would reverse the surge of bank deposits that occurred after the markets tanked in 2000. Already, there are signs of an outflow. According to the Federal Reserve, bank industry deposits declined by 1% in the last five months of 2003. A recent report by Prudential Equity Group LLC estimated that two-thirds of large banks saw negative deposit growth in the fourth quarter.

Nothing is certain, of course. Customers could stay longer in bank deposits if the market recovery stalls. Rising interest rates, for example, would make money market yields relatively more attractive while probably harming equities. And terrorism is always a wild card. But assuming an improving economy continues to propel the markets, banks could face a deposit challenge. Can they handle it?

Interviews with half a dozen retail executives around the country suggest most institutions are fairly confident. Like First Tennessee, these banks have licensed their branch employees to sell mutual funds and/or stocks. Many are providing financial plans free of charge to entice investment customers. And all are broadcasting the message that they are indeed in the business of selling investment and insurance products in addition to their typical bank offerings.

Institutions that are serious in their approach stand a decent chance of success. After all, banks do enjoy a good reputation for ethics and objectivity among the general public. A well-focused strategy that puts a premium on objectivity and best-of-breed products should make measurable gains.

But changing the predominant mindset about where to find investment advice entails substantial costs. Broadening product offerings requires that front-line staff members — especially platform officers — correctly identify sales opportunities and articulate to customers why they should consider a conversation with an investment specialist. That means banks need to invest heavily in training and provide the proper incentives and organizational support to make the effort worthwhile.

Even then, banks risk being ignored if consumers still think that they'll be better off with traditional brokers or direct-sales mutual funds.

Licensing Employees

Selling investment products in branches isn't new; many banks have been at it since the early 1980s. Some report that as many as 20% of their deposit customers have investment accounts. Richard Ayotte, chief executive officer of St. Petersburg, Fla.-based American Brokerage Consultants Inc., which advises banks on third-party investment sales programs, says banks with effective programs can net $1,000 in securities commissions for every $1 million they hold in deposits.

Few banks would claim that investment services make more than a small contribution to overall retail revenue right now, although executives with large institutions increasingly rank boosting investment sales among their top priorities. "To attract, retain and expand customer relationships, we need to be in the investment business," says Betty Moon, national sales manager and senior vice president for National City Retail Investments, a unit of National City Corp. in Cleveland.

Raising the visibility of bank investment services is especially important right now, as the stock market recovers. Although consumers have parked billions of dollars in bank deposits since the markets tanked four years ago, banks have little expectation of holding those funds forever — at least in insured deposit accounts. Consumers grew quite comfortable with investing in the 1980s and 1990s and are unlikely to keep their life savings in bank deposits again, as they did generations ago.

To provide alternatives, banks are building up the ranks of people in their branches who hold licenses to sell investment products. These licenses include the relatively accessible insurance license, which enables one to sell fixed annuities, and the National Association of Securities Dealers' Series 6 license, which authorizes the sale of variable annuities and mutual funds. Less common is the more difficult-to-obtain Series 7 license, which allows the holder to sell stocks and bonds.

Generally, banks get regular branch employees equipped with insurance or Series 6 licenses and then have Series 7 brokers on call to provide that service to a group of branches. Many are trying to boost the number of Series 7 people available.

National City, for example, had a ratio of one Series 7 broker to every seven offices last fall, but is now seeking to bump that up to one broker per five branches this year. Cincinnati-based Fifth Third Bancorp has a Series 6 licensed platform officer — whose responsibilities still include opening accounts and taking consumer loan applications — in nearly every one of its branches, but is encouraging most of those people to obtain a Series 7 license as well. Citigroup Inc. seeks to staff all of its branches with at least one person who can sell stocks and bonds.

Whatever the mix of licenses, rewarding bankers for generating investment sales — either directly or by referring prospects to brokers — is essential. National City adds a twist to its incentive compensation plan, giving brokers a bonus when branches they support meet deposit balance goals. This is a departure from the practice a few years ago, when brokers and bankers occupied the same branches, but worked for distinctly different parts of the parent company, says Doug Singer, executive vice president and sales manager for National City's branch network.

"The brokers didn't necessarily care that they were raiding the balance sheet," Singer says, "and the bankers did everything they could to protect the balance sheet."

Trusted Advisors

Banks support their investment services with a mix of in-branch signage, direct mail, telemarketing, statement stuffers, advertising and direct solicitation. Most of all, however, they try to talk up investment services in the course of face-to-face contact in the branch. Fifth Third, for example, encourages customers who apply for a checking account to take a cash management account instead, which combines traditional banking and brokerage.

Most marketing is done at a fairly modest pitch. Required disclaimers, telling customers that investments are not federally insured, preclude banks from "shouting too loudly that we have investment products," says George B. Hoffmann 3d, executive vice president and head of retail banking at Zions First National Bank in Salt Lake City.

If aggressive marketing of investment services is uncomfortable, however lower-key, one-on-one conversations may be more appropriate. A platform officer who is licensed to sell fixed annuities, and perhaps also mutual funds, might pose a question as simple as, "what is the purpose of this money?" to someone who walks in intending to buy a certificate of deposit, says Louis George, vice president and regional manager of M&T Securities, a unit of M&T Bank Corp. in Buffalo, N.Y. That could easily lead to a broader conversation about financial goals and tools the bank offers to meet those goals. Such an approach leverages the trust that customers traditionally have had in their banks.

"Banks have the best franchise among all the financial services companies in terms of being the most trusted players out there," says consultant Ayotte. Combine that trusting relationship with regular contact with customers and banks are well positioned to keep an eye out for life events, such as the sale of a home, a mortgage application, a car purchase, a big deposit or a big withdrawal. These events signal it's the right time to talk about personal finances. "If one is attentive to these things," Ayotte says, "there are many, many opportunities to start a conversation."

A favorite tool at many banks for starting such a conversation is a personal financial profile. In recent years, many medium-sized and large banks have developed questionnaires that size up how well customers are managing their personal financial affairs. These profiling tools can help identify inappropriately high levels of debt, gaps in insurance and imbalances in investment plans.

KeyCorp's profiling tool provides its bankers entrée to everything from figuring out how much a customer needs to sock away each month for future college bills to sophisticated work on estate planning, says Jack L. Kopnisky, president of consumer banking for the Cleveland-based company.

First Tennessee has one of the most extensive financial planning systems in the business, employing 43 certified planners in its home state. These planners, stationed in central locations, get most of their referrals from the company's branches, trust offices, commercial bankers and home mortgage offices. They did 7,500 plans last year, which produced $300 million in investment sales and $265 million in insurance sales. Burkett would like those sales to constitute 25% of First Tennessee's retail revenues by 2006, up from the current 18%.

Rhomes Aur, First Tennessee's executive vice president of wealth management, says these plans are a critical tool for getting customers to be receptive to buying investment products, even though there is no obligation to do so. "We tell the customer that the planner is salaried and objective and they open up to the planner, more than they would to a broker.

"Despite the down market, we've grown our investment sales in the double digits in each of the last three years. We're also uncovering many more insurance sales opportunities than in the past."

First Tennessee tracks customers after they complete a financial plan and also after one-year reviews. Investment sales made during those 12-month periods are credited to the plan. On that basis, the bank estimates that its investment sales to customers who have gone through the planning process are four times higher than for those who haven't.

"Financial planning has added a lot of value in terms of helping us with customer retention," Burkett says.

Savings Vehicle

Even as bankers pursue these opportunities, skeptics abound. "I don't think banks have a value proposition that rings true for the customer," says Peter Carroll, a principal with Mercer Oliver Wyman, a unit of Marsh & McLennan Cos. Inc.

Carroll, who is based in New York City, particularly doubts that banks can deliver useful advice to their customers, unless they spend far more than would be prudent to hire people with real financial depth. They're unlikely to generate sufficient business to justify placing a Series 7 rep in every branch, he says, adding that banks with mortgage companies "went through the same elaborate charade of trying to have a mortgage officer in each branch."

As for financial plans, Consultant Tom McGrath, managing partner of Bank Earnings International LLP in Orange, Va., says the universe of customers worth profiling just isn't that large. "It won't do any good to profile a free-checking customer who has $100 in their account," he says. "You can't justify the time and expense below some threshold."

And it's true that banks are having a hard time penetrating the mass market with investment or insurance sales. First Tennessee, for example, says that while it offers its financial planning to all customers, affluent clients are more likely to take advantage of the service, and also are more likely to buy investment products.

Still, banks have little choice but to give investment sales a shot if they're going to hold onto a larger part of their customers' financial business. In today's complex financial markets, insured bank accounts represent only one product among many. "I would argue that for more and more Americans, the mutual fund is the primary savings vehicle," says Wil Daly, Fifth Third's chief marketing officer.

And even though middle Americans haven't traditionally associated banks with investing, bank executives say there's no reason they won't as time passes. At Zions, where about 20% of checking customers have investment relationships, Hoffmann says, "I see no reason why we couldn't take it to 40% or 50%."

He also concedes, however, that this could take a decade, since other providers will be hard to dislodge. "People's relationships with their investment advisers are like their relationships with bankers and insurance agents. If they're comfortable with somebody, finding a reason to make a move is a difficult proposition."

And building this business will require more than just throwing licensed bodies at the challenge. It likely will also require some hard thinking about the role of platform officers. Banks need to invest in some heavy training and carefully thought out incentives to get these officers to smoothly hand off investment opportunities to the appropriate specialists.

There is a debate among executives as to how much expertise front-line branch employees actually need. One school of thought holds that the expertise required is minor, since the employees are mainly making referrals. Others argue that branch employees need some fairly sophisticated knowledge to identify the appropriate sales opportunities.

Citibanking North America, for example, supports all its platform officers in preparing for insurance and mutual fund licenses. "They need to be credible and conversant," says Maura Markus, president of the U.S. retail unit of Citigroup. "That's why we get them licensed." Still, she expects these employees to refer customers with more complex financial needs to Series 7 brokers.

Zions similarly sells stocks and bonds only through full-time brokers. But differing from Markus, Hoffman doesn't think branch platform officers need much expertise in investing and financial planning to make successful referrals. Time will tell who is right. Everyone agrees, however, that the first contact with customers is critical, one way or the other.

"The very first person customers run into is going to determine whether this is a waste of time or not," McGrath says.

Mr. Stoneman is a freelance writer based in Albany, N.Y. Mr. Cline is senior editor of Banking Strategies.

Copyright © 2004 by Banking Strategies, published by BAI.

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